Devilish Details From Yesterday’s Announcement

Yesterday’s mortgage rule changes sparked as many questions as answers.  Here’s what we know (to the best of our knowledge) at this point. The quotes come from an insurer memo we received…

Qualifying Rate: 

• Regardless of the mortgage term you choose, the interest rate used to qualify you will be “the greater of the contract rate and the Approved Lender’s five-year fixed rate.”
• There is big confusion about which 5-year fixed rate will be used:  discounted or posted.  A source at CMHC tells us this is the #1 question they’ve been getting. 
• It’s a key point because posted 5-year rates are as much as 1.6% higher than 5-year discounted rates.  If posted rates are used, it means borrowers will qualify for lower mortgage amounts.
• The Finance Department is apparently aware of this ambiguity and is expected to announce clarification on this point in the next few days.
• It’s interesting to note that CMHC used to require that lenders use the 5-year posted rate to qualify people on variable-rate mortgages. Perhaps they’ll go back to this?  We’ll see.

Second Homes:

• CMHC will no longer insure 2nd homes with more than one unit.
• The borrower or his/her relative must live in the property “at some point during the year” and on a “rent-free” basis.  Lenders must confirm that this will be the borrower’s intention.

Rental Debt Servicing Changes:

• This is a biggy if you want to buy rental properties.  CMHC is changing how rental income is used in a borrower’s debt service calculations (TDS formula).
• Previously, CMHC allowed 80% of the gross rental income from all rental properties to be deducted from the total household debt service cost when calculating the TDS ratio.
• Effective April 19, “50% of the gross rental income from the subject property may be included into the borrower’s gross annual income for the purposes of calculating the borrower’s TDS ratio.”
• Rental income for all other rental properties will be treated the same as regular non-salaried income.  Borrowers will need to prove rental income. That will be done “using the average income for the previous two-year period from line 150 of the borrower’s two most recent CRA NOAs.”  Borrowers will be able to “gross up” the non-salaried portion of that line 150 income by 15%.
• In practice, lenders may instead simply choose to rely on line 126 (“Rental Income”) on the borrower’s tax return.
• For non-subject rentals, lenders may be allowed to make exceptions where the borrower does not have a two-year track record of a property and can prove rental income by some other means. (This is unconfirmed.)
• The new TDS formula:

   PITH (subject property) + Other Debt Costs 
      Gross Annual Income + 50% rental income

*  PITH = Mortgage payments, taxes, heat, and 50% of condo fees.

Borrowed Down Payments:

• We hear that borrowers might no longer be able to borrow their down payments on an insured rental mortgage.  We’re awaiting confirmation of this.

Porting Existing 95% Rental Mortgages:

• If you switch an existing rental mortgage to a new lender, and the loan-to-value is over 80%, you will not be affected by the new 80% maximum LTV requirement. (As long as the loan amount, LTV, and amortization do not change.)

5+ Unit Rental Properties:

• 5+ unit rental mortgages will not be affected by these changes when insured under CMHC’s Multi-Unit program.

The above changes will apply to all mortgages with signed commitments dated after April 18.  The rules are still subject to final review by the Department of Finance.

If these rental rules go through, they’ll have drastic effects on rental financing. We’ll do another piece on the repercussions of this shortly…